ELLIOTT WAVE ANALYSIS - Latest Market Commentary
During the latter half of last week, equities continued their upward spurts but have already reached critical short-term resistance. The S&P 500 traded into the 1990.00+/- area, the Eurostoxx 50 almost touched its 3230.00+/- upside target and in Asia, the Nikkei 225 is closing in on ultimate objectives to 15810+/-. Reversal signatures are now expected, but we foresee short-term divergences to set in once sell-offs from current levels have occurred. This is due to the fact that although stock indices in general are engaged in a topping process, the underlying Elliott Wave patterns differ as well in structure as in degree. This in turn implies different amplitudes to unfold in the short-term. Whereas for example the S&P 500 is shown with limited downside towards the 1975.00+/- area prior to a finalising move higher afterwards, European indices like the Eurostoxx 50 and Xetra Dax should underperform during the next several trading days as they are about to complete a 2nd wave within an ongoing five wave expanding-impulse decline. Thus, the expected sell-off should pull these indices much lower as compared to the S&P 500. An exception amongst the U.S. indices is ### the Nasdaq Composite. A much wider loss than a year ago put Amazon into focus of investors – shares of the Seattle retailer staged a collapse of more than 10% on Friday which helped to pull the Nasdaq index significantly lower. This is in line with the very short-term Elliott Wave projection: a single zig zag has been identified in progress from the July high of 4485.90, with immediate downside potential towards 4350.60. Thus, although the Nasdaq is expected to significantly underperform the S&P 500, they should synchronise afterwards in their attempt into higher highs. In Asia, the Shanghai Composite has broken above the June high of 2087.32. This changes the advance from the July low of 1991.06 into a double zig zag sequence and, more importantly, delays the conclusion of the multi-month contracting symmetrical triangle. Idealised upside is measured to current levels – a stretch higher above the April high of 2146.67 would trigger additional upside to 2164.81. A reversal from either of these levels is forecast to trigger substantial downside acceleration which would corroborate a larger decline in the months ahead – ultimate objectives remain towards 1500.00+/-. The Nikkei 225 has continued higher during the last days which highlights the original upside target to 15810 – a reversal from there will validate the resumption of the larger downswing that began from the Dec.’13 high. Australia’s ASX is also approaching upside resistance for the completion of a multi-month upswing. A reversal from the 5631+/- area would trigger a decline which is forecast towards ultimate objectives at 4850+/- in the months ahead.
The US$ index’s upside continuation is adding evidence to the scenario that depicts a five wave expanding-impulse advance in progress from the May ’14 low of 7890. This impulse pattern is labelled as the finalising leg of a multi-year upswing that is forecast to ultimate upside objectives at 8885+/- in the months ahead basis long-term fib-price ratio measurements. This scenario tallies with the Euro’s forecast of continued declines towards 1.2528 to finalise a multi-month expanding flat sequence labelled wave ‘B’ within the larger single zig zag upswing that dates back to the 1.2042 low in July ’12. Our eyes will be fixed on the 1.3396+/- support area for the Euro during the next days, as a strong price rejection from there would ### still keep open the possibility of a more modest decline from its 1.3993 high, with downside targets measuring only to 1.3210+/- prior to a subsequent advance to 1.4500+/- into late 2014. This ‘alternate’ count however is deemed a lower probability – the perfect negative correlation with the US$ index (despite the different pattern structure) clearly favours downside acceleration from current levels. Sterling has now completed a full-fledged reversal signature from the 1.7192 high which sets the stage for downside acceleration from current levels that would corroborate a larger 2nd wave decline. As this is counter-balancing the preceding advance from 1.4813 in its entirety, a fib. 50% retracement measures to ultimate downside at 1.5959 in the months ahead – a fib. 61.8% ‘golden ratio’ cut suggest significant support towards 1.6419. With US$/Yen’s break above the mid-July high of 10181, it has become clear that the rally from the July low has to be evaluated as a corrective sequence that is counter-balancing the preceding decline from 10228. This allows for brief upside potential towards 10210 prior to a reversal. As the 10228-10106 decline adds another smaller 1st wave to the accumulated 1-2-1-2-1-2 structure from the 10548 high, a reversal from 10210+/- should trigger a collapse-like downside acceleration during the next weeks that would corroborate the larger-term picture with ultimate downside to 9227+/- in the months ahead.
Bonds (Interest Rates)
Regarding long-dated yields, a short-term divergence could occur during the next several trading days as US10yr yields are shown to have completed a single zig zag at the recent 2.439% low. As this is deemed part of a double sequence, a separating ‘X’ wave is required to unfold with upside potential measured towards the 2.600+/- area. The DE10yr yield, in contrast, is still on its way to finalise a smaller fifth wave towards the 1.078% support prior to staging a more substantial counter-trend rally to 1.291%. Although this implies a short-term de-synchronisation, we maintain ### the outlook of a prevailing downtrend for both the US10yr and DE10yr yield during the next months. This results in ultimate downside objectives to 2.355% for the US10yr yield which is shown to finalise a multi-month expanding flat pattern whilst its German counterpart is projected to a historical low at 0.849%, exceeding the existing 1.120% support that was established in July 2012.
The recent COT-report shows that market investors are holding a 2-year record amount of long positions. This is an excellent contrarian signal that fits into the framework of the current Elliott Wave forecast as gold is seen to have finalised a multi-week counter-trend sequence at July’s high of 1344.93 and is now poised for downside acceleration. The important level to watch during the next several days is 1272.43 – a quick break lower is expected that would corroborate downside continuation towards 1100.00+/- in the months ahead. An upside reversal from there would otherwise endanger the downside momentum and point to the possibility of additional upside towards 1475.03. Although silver traded into short-term support at 20.19-19.96 and has not been able to break lower, the propensity of downside continuation during the next weeks is very high. Similarly to gold, silver completed an expanding flat correction at the 21.60 high and is now projected to ultimate downside at 17.43 in the months ahead. This will complete ### the final leg of the 5th wave within an ending-diagonal pattern and, more importantly, end several degrees of trend which will give rise to a substantial advance thereafter. Failure to accelerate lower would otherwise suggest a multi-month horizontal flat sequence in progress from 18.22 with ultimate upside projected to 25.12. Oil did not break above the critical resistance level at 103.90 and instead turned lower last week. This reinforces the current outlook that interprets the current sell-off as the 5th of a 3rd within the five wave expanding-impulse decline from 107.68. Next support is measured towards 96.63 and ultimate downside remains unchanged to 94.41 to complete a larger 2nd wave expanding flat pattern that dates back to the 105.22 high in March this year.